Health care is the American economy’s proverbial Land War in Asia — an intractable battle of much pain and elusive victories. To great fanfare Amazon, Berkshire Hathaway, and JP Morgan Chase have announced their intention to march together into this treacherous terrain.
Welcome news, but it remains to be seen whether they can adapt to a drastically different landscape than they currently inhabit.
Jeff Bezos, Warren Buffet, and Jamie Dimon likely earned more money this morning before coffee than I will in my lifetime. However, health care is a massive departure from their prior accomplishments. Over a century or more, we’ve ensnared the industry in a web of laws, regulations, customs, and truisms that immobilize the innovative forces Amazon unleashed on retailing.
With this in mind, here are seven thoughts I would offer the trio:
The trio ought to reconsider a key tenet of their press release — the impulse to construct a health-care company “free from profit-making incentives.” Amazon, Berkshire Hathaway, and JP Morgan Chase are gigantic, innovative companies, but their achievements emerged from the relentless pursuit of profits. A not-for-profit monopsony is an unlikely vehicle for spurring innovation and chasing elusive efficiencies.
For a stunning counterexample, few if any health-care entities on earth can match the economic and humanitarian achievements of Dr. Devi Shetty’s for-profit Narayana Health. Narayana’s 21 medical centers have brought lifesaving surgical procedures within financial reach of India’s poor. A coronary bypass costing $100,000 in the United States costs a little over $1,000 at Narayana hospitals (or around $30,000 at their Health City Cayman Islands, an hour and a half south of Miami).
Narayana’s treatment outcomes equal or exceed those at the finest American and European hospitals. Narayana’s extraordinary success in reducing hospital-borne infection puts many developed countries to shame.
These achievements arose from a plea from Shetty’s famous patient, Mother Teresa. But the profit motive was entirely consistent with high consumer satisfaction and lean production methods.
2. Focus on value, not spending.
The new venture may hamstring its own efforts if its primary goal is to cut health-care spending. A better, more attainable focus is helping employees (and others) get more value out of however much they choose to spend on health care. The Amazon/Berkshire/JP Morgan announcement ominously warned, “The ballooning costs of healthcare act as a hungry tapeworm on the American economy,” with the implicit suggestion that this new consortium might be just the taenicide we need.
Just about everyone — left, right, center, and indifferent — accepts some version of this assertion. But there’s a large element of self-perpetuating myth in it.
Yes, America spends more on health care (in raw dollars and as a percentage of GDP) than any other country. But this doesn’t result from avarice, incompetence, or our peculiar insurance system. America differs from other countries, but not just in the structure of our health care sector.
While our health-care-to-GDP ratio is unusually high, our health-care-to-personal-consumption ratio is only a tad higher than that of other developed countries. Even that tad-higher tranche is easily explained: Americans have far more wealth per capita than our peers, and we choose to spend a fair amount of it on health care.
Our health care-to-GDP ratio seems out of kilter because Americans have especially low rates of saving. You’ll likely find that Americans also spend much larger share of GDP on the sort of retail goods that Amazon sells — or on education, entertainment, or housing. Ultimately, our high consumption may be unsustainable, but the problem isn’t unique to health care. Nor is it remediable by health-care-specific nostrums.
Amazon didn’t stanch our ravenous appetites for retail goods or exert market power to cut retail spending.
Amazon didn’t stanch our ravenous appetites for retail goods or exert market power to cut retail spending. Rather, the online retailer enabled billions of consumers to get far more value in exchange for however many dollars they chose to spend. (And they did so by enabling vendors to earn higher profits by going through Amazon.) Lowering costs, rather than squeezing spending or profits, will yield greater success.
3. Build a wall (no, not that wall).
Success will require a high, thick firewall separating the health-care venture from the core businesses of Amazon, Berkshire Hathaway, and JP Morgan Chase. The Jeff Bezos who revolutionized retailing was a 30-year-old high-stakes roller with a garage stuffed with books and shipping materials — not a 54-year-old with a $100 billion fortune. The portfolios of Berkshire Hathaway and JP Morgan Chase undoubtedly include investments in health-care companies that would be harmed by disruptive innovation.
In The Innovator’s Prescription, Clayton Christensen, Jerome Grossman, and Jason Hwang cited IBM as the rare example of an established company becoming a disruptive innovator. IBM PCs revolutionized computing in part by rendering IBM’s traditional products obsolete. IBM pulled off this miracle through a particularly far-sighted management strategy: distancing the PC division from headquarters, both managerially and geographically.
4. Damn the supply chain, full speed ahead.
Much of Amazon’s genius lay in squeezing the supply chain — cutting out middlemen and using the company’s formidable marketing power to force vendors to lower prices. But health-care services are not books or consumer electronics.
In health care, many middlemen are locked into place by law, regulation, and custom. For some services, a nurse practitioner is a perfectly adequate and highly economical provider of care; yet many states require a physician to expend costly time overseeing the nurse’s work — even when there’s no medical reason for this added layer of management.
In some states, a patient may engage with a physician via telemedicine only if accompanied by a “telepresenter” — a nurse or technician physically present with the patient. The U.S. Food and Drug Administration is excessively slow and cautious in approving new drugs and devices, significantly raising costs.
Our century-old web of health-care laws, regulations, and customs may suffocate the trio’s efforts unless their new entity willingly engages in the strategies my colleague Adam Thierer calls “technological civil disobedience.”
To dramatically lower transportation and hospitality costs, Uber and AirBNB had to flout existing rules and resist attempts to throttle their efforts. In health care, the trio will face lobbying muscle taxi companies can only dream of.
For better or worse, Amazon, Berkshire Hathaway, and JP Morgan Chase are consummate insiders, and some within their organizations will be sorely tempted to dissuade the health-care entity from engaging in battles guaranteed to rankle friends and associates.
With static production processes and supply chains, cost compression will be severely limited. European physicians earn less than American doctors, partly because bright, creative, hard-working Europeans have fewer career alternatives than their American counterparts. Push American physician salaries downward, and those with ambition will abandon medicine for opportunities that are much rarer in Europe — such as careers at Amazon, Berkshire Hathaway, or JP Morgan Chase.
Adjusted for risk, returns on investment in other areas of American health care — hospitals, pharmaceuticals, devices — are not excessively high, despite popular perceptions. Unless production methods (including the regulatory process) change, downward pressure on prices will mostly fail or, if successful, reduce the quantity and quality of care.
Success requires shifting some care from more expensive providers (such as physicians) to less expensive providers (such as nurse practitioners), intelligent machines, and patients themselves.
5. Let the talent find you.
The trio pins its hopes on “putting our collective resources behind the country’s best talent.” Health care bears a widespread, destructive assumption that such talent must be identified and anointed by established powers — governments or corporate giants. Amazon was not selected for its task by the Department of Commerce, Books-a-Million, or Sears, and health care is not immune from the dynamics that govern innovation in other sectors.
The trio is far more likely to succeed if it builds an environment that provides opportunities for bottom-up innovators (including those who begin in garages), rather than hand-picking innovators and attempting to push their plans downward.
6. Listen to Santayana.
George Santayana famously wrote, “Those who cannot remember the past are condemned to repeat it.” Previous would-be disruptors inadequately comprehended the unique and monumental challenges of health care.
State health-care bureaucracies proved effective at resisting out-of-state encroachment.
When I worked for Chase Manhattan (predecessor to JP Morgan Chase), American banking transmogrified from a state-by-state, branch-by-branch affair to giant institutions stretching across state lines and product lines. Soon after, the “managed-care revolution” seemed poised to lead health care in the same direction. Doctors would become employees of nationwide practice management companies, and hospitals would coalesce into vast coast-to-coast chains. While physician practices and hospital chains did grow larger, the anticipated health-care empires and colossal savings largely failed to materialize. State health-care bureaucracies proved effective at resisting out-of-state encroachment.
7. Act globally, think locally.
Above all, the trio needs to understand that health care is an intensely local good — wholly unlike the highly fungible products which underlie the business models of Amazon, Berkshire Hathaway, and JP Morgan Chase.
Recently, Amazon shipped a $1,000+ wooden shed to me, and the company needed only my address and credit-card number. They could just as easily have shipped the shed to California or Australia. My health insurer, in contrast, requires fine-grained knowledge of the doctors, nurses, hospitals, and laboratories in my vicinity. I have a particular doctor and a favored hospital, and those are things you can’t mass produce, warehouse, and ship hither and yon.
So, with these seven points in mind, what are we to make of this announcement? By joining forces, Amazon, Berkshire Hathaway, and JP Morgan Chase bring enormous wisdom, skills, and financial power to bear. Their effort presents considerable promise and potential. But to succeed, this trio will have to adopt strategies and tactics differing radically from their standard operating procedures. Even then, they will be up against a formidable array of conventions and adversaries.
Journalists and markets ought to view this development optimistically, but cautiously. Going a step beyond Churchill’s bon mot, this is not the beginning of the end, nor the end of the beginning. It is, perhaps, the beginning of the beginning.
— Robert Graboyes is a senior research fellow with the Mercatus Center at George Mason University. He is author of “Fortress and Frontier in American Health Care” and co-author of the Healthcare Openness and Access Project (HOAP).